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Line of duty - defining the scope of a professional adviser’s liability

In BPE Solicitors and another (Respondents) v Hughes-Holland (in substitution for Gabriel) (Appellant) [2017] UKSC 21, the Supreme Court has reaffirmed and clarified the often misunderstood 'SAAMCO principle'.

In South Australia Asset Management Corporation v York Montague [1997] AC 191 (SAAMCO), the House of Lords ruled that a professional adviser will only be liable for damages claimed for negligence falling within the scope of a professional adviser's duty to his client. In BPE Solicitors, the Supreme Court has considered the SAAMCO principle for the first time. In a unanimous decision, the court upheld the principle and clarified its proper application and effect. The BPE Supreme Court decision is now the leading case on the SAAMCO principle.

The issue

As Lord Sumption commented when handing down the judgment, this appeal raised one of the 'classic problems' of the modern law of damages. The issue before the court was the following:

What damages are recoverable in a case where:

but for the negligence of a professional adviser his client would not have embarked on some course of action; but

part or all of the loss which the client suffered arose from risks which it was not part of the adviser's duty to protect his client against?

The facts

In 2007 Mr Richard Gabriel agreed to lend £200,000 to a company owned by his friend, Mr Peter Little, in connection with the development of a disused heating tower into offices. Under the terms of the loan, Mr Gabriel was to be repaid £270,000 after 15 months. Mr Gabriel made the loan on the basis of his assumption that it would be used to finance the development of the property. In fact, Mr Little intended to use the monies to fund the purchase of the property from another of his companies and to discharge a £150,000 bank charge and a VAT liability.

Mr Gabriel instructed BPE Solicitors (BPE) to draft the loan facility agreement. Somewhat unconventionally, these instructions came via a voicemail left by Mr Little in which he stated that Mr Gabriel was lending the money to fund the purchase of the property. BPE did not seek confirmation of those instructions from Mr Gabriel.

BPE prepared the facility agreement using a template from an earlier aborted transaction and failed to remove wording which stated that the purpose of the loan was 'to assist with the costs of the development of the property', which unfortunately confirmed Mr Gabriel's inaccurate understanding of the nature of the transaction. It was clear that, had BPE included the correct information in the facility agreement, thereby making Mr Gabriel aware of Mr Little's true intentions for the loan, Mr Gabriel would not have entered into the deal.

The loan was used to fund the purchase, the development never took place and the company defaulted on the loan. Mr Gabriel lost almost all of the £200,000.

The proceedings

Mr Gabriel brought claims against Mr Little and both companies for fraud and negligent misrepresentation. He also sued BPE for dishonest assistance in breach of an implied trust of the loan monies and for negligence. The claims against Mr Little and the companies were dismissed, and the trial judge held that there was no implied trust of the loan monies, so BPE could not be liable for dishonestly assisting a breach of it.

The trial judge found that BPE had no duty to advise Mr Gabriel about the commercial risks associated with the deal but it should have explained to him that the funds would be applied for Mr Little's benefit and that, in reality, Mr Little was not putting anything into the project. BPE had negligently allowed statements to appear in the facility agreement which suggested the opposite. The trial judge awarded Mr Gabriel damages for the whole of his loss on the basis that, but for BPE's negligence, he would not have entered into the deal and would have suffered no loss.

The trial judge accepted that BPE would not be liable if it could be shown that Mr Gabriel would have suffered the same loss even if the loan had been applied to the development of the property or, in other words, if the development plan was in fact commercially unviable.

The Court of Appeal allowed BPE's appeal, holding that:

Mr Gabriel had been unable to show that he would have recovered the loan if it had in fact been applied to the development. Mr Gabriel's loss was the result of the commercial risks inherent in the deal; and

that loss fell outside the scope of BPE's duty to Mr Gabriel.

Mr Gabriel's damages were reduced to nil.

The Supreme Court

Mr Gabriel's trustee in bankruptcy appealed to the Supreme Court.

The Supreme Court unanimously dismissed the appeal and upheld the reasoning of the Court of Appeal. Lord Sumption delivered the sole judgment, with which Lords Neuberger, Mance, Clarke, and Hodge agreed.

The court accepted BPE's factual argument that the £200,000 loan would not have enhanced the value of the property so as to make the deal commercially viable for Mr Gabriel. BPE was not legally responsible for Mr Gabriel's decision to lend the money, only for confirming his assumption about one factor he considered in that decision. Therefore, all of Mr Gabriel's loss arose as a result of his own commercial misjudgements and none of it was within the scope of BPE's duty to him.

The SAAMCO principle

In his judgment Lord Sumption charted the development of the SAAMCO principle and explained its application. When handing down the judgment he gave a useful summary of the principle. He said: 'In order to recover damages, it is not enough to show that but for the defendant's breach of duty the claimant would not have entered into the transaction and thus would have avoided the loss. There must be a sufficient relationship between the loss suffered and the particular respect in which the defendant broke his duty.'

Distinction between 'advice' and 'information' cases

In SAAMCO, Lord Hoffmann distinguished between two different types of duty a professional adviser may have to his client. In the BPE judgment Lord Sumption provided further elucidation of these two categories and the distinction between them, acknowledging that the descriptive inadequacy of the labels has caused some confusion.

'Information' casesIn cases such as BPE the professional adviser contributes a limited part of the material on which his client will rely in deciding whether to enter into a prospective transaction. The adviser leaves assessment of all other aspects and the decision to his client.

Crucially, the adviser's legal responsibility does not extend to the decision itself. This means that even where the information provided by the adviser is critical to the client's decision to enter into the transaction, the adviser is liable only for the financial consequences of that information being wrong and not all the financial consequences of the client entering into the transaction.

Lord Sumption noted that a valuer or conveyancer in a property transaction will rarely supply more than a specific part of the material on which his client's decision will be based, so it is likely that most professional negligence claims against valuers and conveyancers will fall into the 'information' category.

'Advice' casesIn 'advice' cases the adviser has a duty to protect his client against the full range of risks associated with a potential transaction and the client will not have retained responsibility for any of them. This means that if a factor is negligently ignored or misjudged and this proves to be critical, 'the client will in principle be entitled to recover all loss flowing from the transaction'.

Lord Sumption considered that professional negligence claims against an investment adviser advising a client whether to buy a particular stock or a financial adviser advising on a particular investment are likely to fall within the 'advice' category.

SAAMCO principle misunderstood

Lord Sumption commented that the SAAMCO principle has often been misunderstood when two fundamental features of the reasoning are overlooked:

Where the contribution of the adviser is to supply material which the client will take into account in making his decision, the adviser has no legal responsibility for the client's decision; and

SAAMCO is a general principle of the law of damages, not a matter of causation.

It is easy to see how this misunderstanding may arise; in BPE Mr Gabriel's loss certainly wouldn't have arisen but for BPE's negligence. However, before the various principles of causation can be considered it must first be shown that the loss claimed falls within the scope of the adviser's duty. While causation is a necessary condition it is not always sufficient because, as Lord Sumption notes, 'a defendant is not necessarily responsible in law for everything that follows from his act, even if it is wrongful'.

The SAAMCO 'cap'

The so called SAAMCO 'cap' is a tool for giving effect to the distinction between: (i) loss flowing from the fact that as a result of the defendant's negligence the information was wrong; and (ii) loss flowing from the decision to enter into the transaction at all. The loss that is outside the scope of the adviser's duty is stripped out.

Lord Sumption responded to criticism that this can be an imprecise way to calculate the loss that is within the adviser's duty, especially where the total loss arises from a variety of commercial factors and it may be difficult to quantify and strip out the financial impact of individual factors. He commented that 'mathematical precision is not always attainable in the law of damages'.

Specific principles from the judgment

The fact that the negligent advice in an 'information' case was critical to the claimant client's decision to enter into the transaction is not sufficient to turn it into an 'advice' case.

The burden of proof is on the claimant client, who must show: (i) that he is worse off than he would have been had the information provided by the adviser been correct; and (ii) that his loss falls within the scope of his adviser's duty.

The court has overturned the decisions in Steggles Palmer and Portman Building Society v Bevan Ashford (a firm) [2000] PNLR 344, which provided authority to depart from the SAAMCO principle where information that a defendant adviser failed to provide would either have shown that the proposed transaction was not viable or would have revealed dishonesty. Neither the unviability of the proposed transaction nor dishonesty will turn an 'information' case into an 'advice' case. There are now no exceptions to the SAAMCO principle.

Professional advisers and their insurers have welcomed the decision, which limits the scope of their liability in all cases to those matters on which they were asked to advise. Claimants who have suffered loss as a consequence of professional negligence will find it more difficult to recover that loss, particularly against conveyancers and valuers in property transactions.

Future litigation may therefore focus more on the scope of the professional's duty, meaning that instructions, as defined in retainer documents, will be increasingly crucial. Professionals will seek to ensure that their instructions are as narrowly defined as possible; clients must be careful to check that the retainers they sign accurately reflect all the advice they are seeking. Both parties need to keep the scope of retainer under review throughout the life of the matter.

Compare jurisdictions: Arbitration

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